"We are reiterating our Aggressive Buy rating on Conoco's shares, with a 12- to 18-month stock-price objective of $34 per share," says Edward E. Maran, senior analyst, integrated oils, for A.G. Edwards & Sons Inc. in St. Louis. Headquartered in Houston, Conoco is an integrated, international energy company, involved in the upstream and downstream segments of the petroleum business, and in power generation. In the upstream, it has oil and gas drilling projects in the U.K. and Norwegian sectors of the North Sea, Venezuela and the deepwater Gulf of Mexico. Downstream, it has refining and marketing operations in Europe, Asia and the U.S. Its total estimated year-end 1999 reserves were 1.6 billion barrels of oil and natural gas liquids, and 6.2 trillion cubic feet of natural gas. Maran's Aggressive Buy on Conoco is based upon three investment factors: the company's upstream production growth prospects, its attractive mix of high-quality assets, and its high return on capital in the downstream. "We expect Conoco's oil and gas production to grow by 9% in 1999, and by another 6% in 2000," the analyst says. The three main sources of this anticipated growth are the company's Petrozuata project in Venezuela, its Britannia project the U.K. North Sea, and its Ursa project in the deepwater Gulf of Mexico. Conoco expects to increase its E&P spending this year by $400 million, to $1.6 billion; the company's total 2000 capital spending program is $2.2 billion. Future exploration is expected to focus on the deepwater Gulf of Mexico, South America, the Atlantic Margin of Northwest Europe, the Asia-Pacific region and West Africa. Maran adds that the company has more than replaced its production for six consecutive years, and that its finding and development cost during the 1994-98 period was $3.96 per barrel of oil equivalent. Besides Conoco's heavy emphasis on E&P, the analyst likes the company's remaining asset mix. "It has no petrochemicals, which are experiencing a worldwide supply glut, and its European and Asian refineries are among the most profitable in their respective regions. The company's Humber refinery in the U.K., widely considered the premier refinery in Europe, and its Melaka refinery in Malaysia are "among the newest and most complex refineries in the region and a potential launching pad for downstream growth throughout Southeast Asia," he adds. The analyst also likes the fact that Conoco's high return on capital in the downstream is being used to fund upstream growth, reduce debt and fund selected downstream growth. "Last spring, the company refinanced $4 billion of its debt, and we expect that in time, it will reduce its debt-equity ratio, which is now 48%. In addition, the large cash flows from upstream projects now coming on line should enable the company to maintain its dividend and make large investments without increased borrowing." The stock is attractively valued, he adds. Despite having one of the best growth outlooks in the integrated oil sector, Conoco trades at a discounted multiple of 2000 earnings of 17 times versus an industry average of 21.1 times. Note: Analysis was on 11-22 when COCb closed at $27.94 per share and was reaffirmed on 1-20 when $24.94. Currently, 637 million shares are outstanding. The recent 52-week price range was $29.38-$20.75.
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